(MONEY Magazine) – All year long, we've been warning that stocks were overpriced, that investment profits would be hard to come by and that you could actually suffer losses of as much as 15%. That cautionary advice looks smart in retrospect. The Dow Jones industrial * average started the year at 3168, advanced 8.4% to a high of 3435 in June, and then fell back to 3137 in October. It was a round trip to nowhere. Despite the subsequent rally, a lot of individual issues are still depressed. Since January, many computer, health-care and defense stocks are off by at least 10% -- and some by more than 30%. Naturally, in the aftermath of Clinton's election as President, small investors have been turning their attention to what the new year may hold. We see a mixed picture -- but one that could reward shareholders who are defensive and selective. First, the good news: Many stock analysts see a market advance over the next six months that could carry the Dow beyond its 1992 high -- a 6% gain from here -- and boost some depressed shares a lot more. Here are their arguments: The election aside, winter is the best season for the market. ''Since 1902, the six-month stretch from November to May has been the best for stocks,'' says Tim Hayes, editor of the newsletter Stock Market Strategy in Venice, Fla. The chief reason: Most investors sell bad performers late in the year to take tax losses. As that selling abates, those stocks generally tend to rebound about 15% -- a phenomenon known as the January effect. Investors have become overly pessimistic. ''The bad news about the economy is well known,'' says Raymond Worseck, chief economist at brokerage A.G. Edwards in St. Louis. ''Everybody who has wanted to sell stocks because of the election and the economy has had a chance to do so.'' The economy could speed up in the first half of 1993. ''Stock prices will move higher in early '93,'' forecasts Joe McAlinden, chief investment officer at Dillon Read in New York City. ''Although pundits will attribute it to the January effect or a Clinton honeymoon, the most important reason will be surprising growth numbers.'' Here's the catch: Odds are that the good times won't last. With a stronger economy, inflation could begin creeping up by late '93 or early '94. And at the first sign of that, long-term interest rates could jump more than half a percentage point from today's 7.6%. ''Higher rates and a hint of rising inflation would hurt blue-chip growth stocks,'' says Stephen Leeb, editor of the newsletter Personal Finance in Alexandria, Va. In all, if the economy slows down toward the end of the next year, stocks could tumble 15% or more. Therefore, your smartest strategy now is this: Keep 25% to 35% of your money in high-quality shares, but buy selectively. You can find solid long-term bargains among technology, pharmaceutical and defense stocks. (See our profile of Martin Marietta, a top defense stock, in the Wall Street column on page 64.) You can also focus on attractive companies that mirror the economy. Among such stocks, Worseck at A.G. Edwards recommends Mead (recently traded on the New York Stock Exchange, $37.50), a leading paper producer with estimated 1992 revenues of $4.7 billion. Dillon Read's McAlinden likes $2.5 billion Centex (NYSE, $28.50), the U.S.' largest single-family-home builder. And Leeb at Personal Finance favors $5.3 billion Intel (over the counter, $67.25), a major producer of computer chips. If the market does rally in early '93, though, don't overload your portfolio with stocks. Where you have substantial winners, consider selling and taking profits. And don't hesitate to keep as much as 40% of your assets in money funds or U.S. Savings Bonds paying 4% after six months. A sizable cash reserve will enable you to buy whenever promising stocks are knocked down to come-and- get-me levels.

BOX:

-- THE ECONOMY Growth could pick up in early 1993, topping 3% at an annual rate. But the economy may start to fade later in the year.

-- STOCKS The Dow could top its all-time high of 3435, a 6% gain from here, and depressed stocks could surge even more. But prices may weaken in the second half.

-- BONDS Long-term issues will be losers, assuming that interest rates do rise more than half a percentage point by the end of 1993.